Sunday, July 6, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 04, 2014

Every one with any stake in the financial markets must be eagerly awaiting the budget proposals by the new government. Chances are that it will be a non-event. The Finance Minister has dropped enough hints at what to expect.

There won’t be any populist proposals. The NDA government has been elected with a massive mandate, and may announce pragmatic measures to put the floundering growth engine back on track. That means spending money – so, taxes and duties are likely to go up.

Both Sensex and Nifty broke out of bullish ‘flag’ consolidation patterns to touch and close at new lifetime highs. But neither index has soared away. Regular consolidations have allowed adding opportunities.

BSE Sensex index chart

The following comments were made in last week’s analysis of the daily bar chart pattern of Sensex: “Note that the index has been receiving support from its 20 day EMA (within the ‘flag’) for the past two trading sessions. A bounce up from here can breach the upper boundary of the ‘flag’.”

Some times patterns play out just as expected. Sensex used the support of its 20 day EMA to break out upwards from the ‘flag’ and closed at lifetime daily and weekly highs.

Daily technical indicators had corrected from overbought conditions, and have turned bullish again. MACD is about to cross above its falling signal line in positive territory. ROC has crossed above its 10 day MA into positive zone. RSI is rising towards its overbought zone. Slow stochastic has entered its overbought zone.

Is it time to celebrate and open up the bubbly? May be not just yet. The budget is just 4 days away. Better to be safe than sorry. Technically, all four indicators are showing negative divergences by failing to touch new highs with the index. Another consolidation or correction may follow.

Stay invested. Use dips to add fundamentally strong stocks. Get rid of non-performers. Tighten up your portfolio for the next leg of the up move.

NSE Nifty 50 index chart

As expected in last week’s update, the weekly bar chart pattern of Nifty broke out upwards from the three weeks long consolidation within a bullish ‘flag’ pattern. Weekly volumes were strong. Nifty touched and closed at lifetime highs.

All four technical indicators are inside their respective overbought zones. While an index may remain overbought for long periods, the possibility of a correction or consolidation occurring at any time should be kept in mind.

Note that volumes – though higher than the average volumes till Apr ‘14 – have been sliding for the past six weeks. No need to panic and sell. But part profit booking is always a good idea. Whatever you do, don’t fall into the trap of trying to make some quick money by investing in ‘penny’ stocks.